Tax Tip 423: Borrow and Park in Offset and Fees Before Using the Money

Sometimes people borrow money before they actually use it and an indirect part of the borrowing results in fees and it is unclear whether these fees relate to the loan and or if they will cause a mixed loan to result.


Example

Homer borrows $100,000 from the bank and parks this in an offset account. He was about to buy income producing shares but the market suddenly went up and he is waiting for a drop to happen before he buys. The bank charges $10 per month in fees for an offset account. He was planning on closing the offset account once he had used it, but now it looks like he might incur about $90 in fees before this happens.

The questions Homer has are:

a) Is the loan a mixed loan?

b) Are the fees deductible?

It seems that the ATO generally treats a loan like his as akin to a Line of Credit – Borrowing and parking the borrowed money in a segregated offset account is like having a LOC at the ready. There are no ATO publications stating this, but this is what I have gleaned from a few private rulings that we and others have applied for.

This could mean that the fees are not fees for other purposes but are fees related to the loan. If the loan is entirely used for investment purposes the fees would be deductible. But are the fees ‘incurred too soon’ if incurred before any investing has occurred? I don’t think so based on the case of Steele, as long as the intention to invest was there from the beginning, and actions were taken with that end in mind.

Make sure you seek your own tax advice on this.

 

Related
Tax Tip 428: Borrowing Costs and Borrowing and Parking the Borrowed Money Tax Tip 428: Borrowing Costs and Borrowing and Parking the Borrowed Money